Saturday, October 24, 2009

Is the recession over?

Yes, and a depression lies in its wake. Why? Lew Rockwell explains:

It is not enough just to stand back and look at points on a chart going up and down, smiling when things go up and frowning when things go down. That is the nihilism of an economic statistician who employs no theory, no notion of cause and effect, no understanding of the dynamics of human history.

So long as things were going up, everyone thought the economic system was healthy. It was the same in the late '20s. In fact, it has been the same throughout human history. It is no different today. The stock market is going up, so surely that is a sign of economic health. But people ought to reflect on the fact that the highest performing stock market in the world in 2007 belonged to Zimbabwe, which is now home to a spectacular economic collapse.

Friday, October 23, 2009

Gold has no intrinsic value

In Part 8 of his series, What is Money?, Gary North writes:

The Austrian School of economics, which was founded by Menger, who taught at the University of Vienna, has always been distinguished above all from the other schools of economic thought by its systematic devotion to a theory of subjective value, meaning imputed value.

If this theory of economic value applies to all scarce resources, this must include gold. There is nothing unique economically about gold's value. It is valued by individual decision-makers in terms of the same subjectivistic process that applies to all scarce resources.

Then where resides gold's stability of value over time? In the minds of acting individuals. Also, in the reality of geology. There is far greater stability of geological conditions than subjective assessments. . . .

When people speak of gold's intrinsic value, this reveals their realization of gold's historic value. Gold has had long historical value, as Roy Jastram's book, "The Golden Constant," revealed over three decades ago. But this constancy is over decades or even centuries, not mere years. . . .

Masses of people once understood what a gold coin was. Their successors do not understand what a futures contract is, or a derivatives contract. Neither did the well-educated fools who lost trillions of dollars a year ago, and whose careers were salvaged only by the Federal Reserve and the Treasury, as run by a Goldman Sachs former CEO.

The Byzantine gold standard lasted over a thousand years. The modern gold coin standard lasted only for a century, 1815–1914. It broke apart because of World War I. Governments wanted to inflate, and the gold coin standard hampered this. So, politicians and central bankers abolished it by fiat.

Modern warfare does not deal lightly with restraints on state power. The gold coin standard was such a limit. It transferred to common people the power to veto the war effort, merely by taking their bank IOUs to gold to the bank and demanding gold coins. . . .

Those who do not trust the wisdom, motivation, and tools of central bankers have a way to express their lack of trust. They can buy some gold coins.

[Click here for links to all of North's installments on What is Money?]

Thursday, October 22, 2009

Another bust coming

Paul Krugman is wrong, writes Peter Cooper; the economy does not need more stimulus packages, it needs to reduce debt. With the

Dow Jones at 10,000 points [you] have a similar tale of an outstanding rebound in equities against a deteriorating economic background, and the worst recession since the 1930s. What is going on?

Even the most casual analysis of cause and effect reveals that the obvious must be true: government interventions since the crash of last autumn have produced some of the most monstrous valuation bubbles in history. Cheap money is the devil in the system yet again. . . .

The Dow Jones is on a trailing price-to-earnings ratio of 140, considerably higher than in the dot-com boom. Well, we know what followed – the dot-com crash.

For Professor Paul Krugman to publicly call for additional stimulus packages is bordering on insanity. Current stock market valuations show that governments can not bend the laws of economics without consequences. They are indeed fueling up the next big bust.

The need is to reduce debt in our economic system to a level that does not produce such unsustainable asset price bubbles, or at least something containable. The system that was saved last autumn is the problem, not the solution.

When Frankie Met Johnny

Gary North discusses the largely unknown meeting between Roosevelt and Keynes in 1934 - two years before Keynes published his General Theory.

Few historians or economists know that the most influential American President of the twentieth century and the most influential economist of the twentieth century had a meeting in June of 1934. This is recorded in a book by Frances Perkins, who served as Roosevelt's Secretary of Labor: The Roosevelt I Knew (1946).

The account appears in Miss Perkins' chapter, "Labor and the Codes." The National Recovery Administration (NRA) under Hugh Johnson in 1934 was forcing businesses to adopt price floors and wage floors. More than any other institution of the early New Deal, the NRA extended the depression. By making it illegal for businesses and workers to offer their goods and services at a market price, the NRA extended unemployment, not just of workers but of all economic assets. Miss Perkins was a big fan of the NRA. . . .

Perkins records that Keynes came to America in 1934 and consulted with members of Roosevelt's administration. She then writes the following.

He pointed out that the combination of relief, public works, raising wages by NRA codes, distributing moneys to farmers under agricultural adjustment, was doing exactly what his theory would indicate as correct procedure. He was full of faith that we in the United States would prove to the world that this was the answer.

What Perkins neglected to mention was that these early New Deal policies were the intellectual offsprings of two books by two non-economists, William Foster and Waddill Catchings. Foster was the president of Reed College, a left-wing school in Portland, Oregon, named after John Reed, the Portland radical who was (and remains) the only American buried in Red Square. Foster's Ph.D. was in English, with a specialty in rhetoric. Catchings was a businessman. Their books, Profits (1925) and Money (1928), offered a defense of the idea that insufficient consumer demand is what causes economic slumps. Their work is generally regarded as pre-Keynesian. It would be more accurate to say that Keynes' work was Foster/Cachingsism. . . .

Here is Perkins' account of the meeting.

Keynes visited Roosevelt in 1934 rather briefly, and talked lofty economic theory.

Roosevelt told me afterward, "I saw your friend Keynes. He left a whole rigmarole of figures. He must be a mathematician rather than a political economist" (p. 225).

Roosevelt had a politician's ability to size up a man rapidly. Did he have Keynes' number! Keynes had earned a bachelor's degree in mathematics. His dissertation, A Treatise on Probability, was respected at the time. He had not majored in economics. His father, Cambridge economist John Neville Keynes, had put up half of the money for Cambridge to hire him. Keynes, Jr. earned no degree beyond the B.A. To call him a legacy scholar would be condescending but accurate.

Perkins added this.

Coming to my office after his interview with Roosevelt, Keynes repeated his admiration for the actions Roosevelt had taken, but said cautiously that he had "supposed the President was more literate, economically speaking" (p. 226).

He had sized up Roosevelt as accurately as Roosevelt had sized up him.

Perkins then added this report on Keynes' words to her. I have seen no better summary of Keynesian economics.

He pointed out once more that a dollar spent on relief by the government was a dollar given to the grocer, by the grocer to the wholesaler, and by the wholesaler to the farmer, in payment for supplies. With one dollar paid out for relief or public works or anything else, you have created four dollars' worth of national income.

Perkins did not ask this question: "Where did the government get that dollar?" This question is also not asked in any college-level economics textbook, and never has been. It deserves at least a subsection.

The absence of this obvious question over the last seven decades provides what I regard as the supreme example of academic blindness in modern times. There are lots of others, but nothing matches this one for its simultaneous simplicity and centrality. Ludwig von Mises was correct. Keynesian economics is the economics of stones into bread. In Paul Samuelson's version, it is fiat money into bread. [Emphasis mine]

Tuesday, October 20, 2009

Schiff: Spending up, industrial output down

With consumer spending contributing 71% of U.S. GDP, industrial output down and the trade deficit expanding, Peter Schiff finds no grounds for saying the economy is recovering.

. . . rather than allowing a painful cure to return our economy to health, the government prefers to numb the voting public with a toxic saline-drip of deficit spending and cheap money.

The primary factor that enables our government to peddle economic snake oil is the dollar's unique role as the world's reserve currency, and our creditors' willingness to preserve its status. By buying up dollars and loaning them back to us through Treasury debt, productive countries give American politicians carte blanche to play Santa Claus.

As long as foreign governments keep lending, we'll keep spending, he observes.

But he thinks the foreign spigot will soon be turned off, and the real depression will begin.

Nothing new: Government steals your savings

From CNNMoney:

This is a quiz. What do the record-high Wall Street bonuses have in common with the record-low yields for savers?

Answer: They show yet another way that prudent people, especially those living on fixed incomes, are being screwed by the government's bailout of the imprudent.

Here's the deal. The government is spending trillions to keep interest rates down in order to support the economy and prop up housing prices, and those low rates have inflicted collateral damage on savers' incomes.

"It's a direct wealth transfer from savers and retirees to overly indebted borrowers," says Greg McBride, senior financial analyst at

But without the bailouts, things would be even worse. RIght?

Monday, October 19, 2009

Stossel on Moore's Capitalism

What is capitalism? Viewers of Michael Moore's new movie, Capitalism: A Love Affair, might get the impression it's what we see going on today - As John Stossel puts it, a system of "businesses manipulating government and strong-arming Congress for bailouts." Moore condemns both activities, as he should, but guess what - that's not and never has been what capitalism is.

Toward the end of the movie, Moore says capitalism is irredeemably evil and "has to be replaced." With what? I assumed he'd say socialism, but instead his answer is "democracy."

This apparently means expanding "hundreds of worker-owned businesses" in the United States.

But since workers are already free to start businesses, what's his point? A more astute observer would show how government intervention—licenses, taxes, regulations—inhibits such businesses. . .

For two hours, Moore rails against reckless banks and government bailouts, but never once mentions the government-business partnership that created the conditions for the turmoil. The fact that America no longer has a genuinely free market is the unnoticed 10,000-pound elephant in Moore's room.

Stossel concludes: Moore's "own evidence suggests that the real answer is a separation of state and economy—stripping away Wall Street's privileges."

"In other words: Limit government's power. Let the free market work."

Saturday, October 17, 2009

Timothy Geithner, Comedian

Last June Treasury Secretary Geithner went to China to reassure them about the American dollar.
A major goal of Geithner's maiden visit to China as Treasury chief [was] to allay concerns that Washington's bulging budget deficit and ultra-loose monetary policy will fan inflation, undermining both the dollar and U.S. bonds.

China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China's total U.S. dollar-denominated investments could be twice as high.

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.
And how did his audience react? Were they all sufficiently indoctrinated and ready to believe the pronouncements of straight-faced government officials?
His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.
Here's to those who laughed loudest.

Friday, October 9, 2009


Mises Institute posted my article on the virtue of hoarding today:
Most people would admit to hoarding money only with a tinge of guilt, because to be a hoarder carries with it the suggestion of being a miser — a Scrooge. And yet, every participant in an economy based on indirect exchange holds some amount of money and can be said to be hoarding it, that is, declining to spend it.
It gets better. Read the rest.

Thursday, October 8, 2009

The Madoff Scale

On December 10, 2008, Bernard Madoff admitted his investment fund was an illusion and a fraud. The illusion was the $65,000,000,000 that vanished into the thin air from whence it came. Stewart Dougherty, the inferential analyst I've cited favorably in this blog, says that "Compared to current fiscal, monetary, economic and financial reality in the United States, Madoff's losses were modest, even quaint."

How modest? How quaint?
The USA's fiscal year 2009 federal loss (which is euphemized for the masses by the term "deficit," which sounds technical, econometric, and not nearly as bad as what it really is, a loss) will exceed $2,000,000,000,000.00, more than 30 times Madoff's $65,000,000,000.00 loss. Keep in mind that it took Madoff a professional lifetime to lose that money; the United States will lose $2 trillion in just one year, and according to official budget projections will continue losing hundreds of billions more, annually, for decades to come. . .

The cost of the government's financial-crisis-related bailouts and guarantees currently exceeds $13,500,000,000000.00, which is 200 times larger than the Madoff scandal. And the nation's unfunded contingent liabilities, for programs such as Social Security, Medicare, Medicaid, government pensions and the like stand at $75,000,000,000,000.00, 1,150 times larger than Madoff's fraud. They should let Madoff out of jail and put him in charge of the Treasury. . .

According to the CBO, over the next SEVENTY fiscal years, the federal government will NEVER have a surplus. Rather, the United States will continue to suffer massive, escalating, multi-hundred billion dollar losses ("deficits") each and every year for the next SEVEN DECADES, which is when the budget projection stops. . . Apparently, America is headed back to the Stone Age, thanks to our profligate politicians and corrupt financial elite.

John Rubino on End the Fed

Writing at, John Rubino talks about Ron Paul's rise from obscurity to become almost mainstream -- not mainstream in his views, by any means, but mainstream in the degree of acceptance he has received.
. . . when [Paul] introduced HR 1207 to audit the Fed, the response was at first respectful, and then enthusiastic. Instead of instantly dismissing him, people began asking their representatives why the Fed isn’t already audited. This law might just pass, with unpredictable but almost certainly amusing results.
Yes, it would be amusing to see Bernanke shoved out the door along with everything else Fed-related. But more than that it would be cause for celebration.

Discussing End the Fed, Rubino says it is "a clearly written primer on how dangerous delusions like unsound money and expanding government have gradually become the unquestioned conventional wisdom." Such dangers were not delusions to most of the country's founders, but mainstream analysts are generally not encouraged to respect the founders, intellectually. Sound money might have been okay for the agrarian society of the 18th century, but today's international scene requires a cartel of bankers producing massive amounts of irredeemable legal tender paper to keep markets thriving and avoid crises.

If you haven't done so yet, please read Gary North's outstanding series, "What is Money?"

Thursday, October 1, 2009

North on Money, Part 2

Why did gold and silver become the market's choice of money? Gary North answers:
Individuals in the past voluntarily adopted gold and silver coins as the preferred commodities to facilitate economic exchange. They did not accept these two metals as the preferred monetary units because of their commitment to economic theory. They chose those metals because there are advantages offered by these metals that competing commodities do not possess to the same degree. The main advantage is continuity of value (price) over time. . .

Gold and silver have been universally recognized by societies throughout the world as reliable forms of money. This has given an advantage to any society that restricted the use of money to gold and silver coins, or warehouse receipts to specific quantities of gold and silver. This is what the 19th century provided more than any society in modern times.

Historically, the only society that has maintained a gold coin standard for 1000 years was Byzantine society, from the fourth century until the 15th century. That was the longest period of monetary stability in the history of man. Eastern Rome was wealthier than Western Rome, and the most important single reason for this was the fact that Eastern Rome had a stable monetary order for 1000 years.
And on the subject of deflation:
When gold and silver coins are the primary form of money, increases [in] the production of nonmonetary assets tends to lower prices. There is a steady increase in the output of goods and services other than money, and therefore we have a situation in which more goods and services are chasing essentially the same quantity of money. This leads to steadily lower prices.

Steadily lower prices are the correct economic goal. Whenever we view scarcity as a liability, then the increase in productivity steadily reduces the effect of this liability. If we want to see a decrease in scarcity, we want to see a decrease in the general price level. As greater productivity enters the society, the competition among sellers of goods and services in order to gain ownership of gold and silver will lead to a reduction of prices.

This is the whole point of competition. We want to see lower prices. Lower prices are an indication of increased wealth. So, deflation, in the sense of price deflation, is a social benefit and an individual benefit. Deflation in the sense of the contraction of the money supply is not a social benefit and not an individual benefit. Gold and silver produce the kind of price deflation that is good for individuals as well as social order. Fiat money produces the kind of economic crisis and monetary contraction that is bad for individuals and social order. [my emphasis]